Corporate Taxation and the Efficiency Gains of the 1986 Tax Reform Act

54 Pages Posted: 29 Dec 2006 Last revised: 4 Aug 2022

See all articles by Jane Gravelle

Jane Gravelle

Government of the United States of America - Congressional Research Service

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Date Written: October 1989

Abstract

The 1986 Tax Reform Act, while having little effect on the overall effective tax rate on U.S. capital income, did reduce significantly the difference in effective taxation of corporate and noncorporate capital within a number of U.S. industries. The Mutual Production Model developed in Gravelle and Kotlikoff (1989) can be used to study the efficiency gains from the reduction in corporate tax wedges within industries. Unlike the Harberger Model, the Mutual Production Model permits both corporate and noncorporate firms to produce the same goods and, therefore, to coexist within a given industry. This paper develops an 11 industry - 55 year dynamic life cycle version of the Mutual Production Model. We use this model to study the steady state efficiency gains associated with the new law. While we do not simulate the economy's transition path, our steady state welfare changes are those that arise from compensating transitional generations for the first order redistribution of income associated with the Tax Reform. We find that the 1986 Tax Reform law reduces excess burden by .85 percent of our model's economy's present value of consumption. This efficiency gain reflects the Tax Reform's reduction in corporate non-corporate tax wedges, particularly in those industries with significant non-corporate production. Measured as a flow the 1988 estimated efficiency gain from the Tax Reform Act is $31 billion.

Suggested Citation

Gravelle, Jane and Kotlikoff, Laurence J., Corporate Taxation and the Efficiency Gains of the 1986 Tax Reform Act (October 1989). NBER Working Paper No. w3142, Available at SSRN: https://ssrn.com/abstract=467583

Jane Gravelle (Contact Author)

Government of the United States of America - Congressional Research Service ( email )

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Laurence J. Kotlikoff

Boston University - Department of Economics ( email )

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Gaidar Institute for Economic Policy

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